What are Preference Shares? Explain the different types of Preference Shares.

Answer: Meaning: Preference shares are shares which carry two preferential rights over equity shares: (i) the right to receive dividend at a fixed rate before any dividend is paid to equity shareholders, and (ii) the right to repayment of capital before equity shareholders on winding up of the company. Under the Companies Act, 2013 preference shares must be redeemable within 20 years (30 years for infrastructure projects). Preference shareholders generally vote only on matters directly affecting their rights, or on all resolutions when their dividend is in arrears for two years or more.

Types of preference shares:

1. Cumulative preference shares: If dividend is not paid in any year, it accumulates and the arrears are paid in later years before any equity dividend.
2. Non-cumulative preference shares: Dividend not paid in a year lapses; there is no right to arrears.
3. Participating preference shares: Besides the fixed dividend, they share in surplus profits after equity shareholders get a certain dividend, and may share in surplus assets on winding up.
4. Non-participating preference shares: They get only the fixed rate of dividend and no share in surplus profits.
5. Convertible preference shares: They can be converted into equity shares after a specified period on agreed terms.
6. Non-convertible preference shares: They cannot be converted into equity shares.
7. Redeemable preference shares: They are repaid by the company after a fixed period or at its option, as per the terms of issue.
8. Irredeemable preference shares: Repayable only on winding up. Under the Companies Act, 2013 an Indian company cannot issue irredeemable preference shares.
9. Preference shares with differential rights / with or without voting rights may be issued subject to the law, e.g. shares with a floating (variable) rate of dividend.

Thus preference shares suit investors who want a fixed and safe return with less risk.